Why home prices are still rising even as inventory recovers | Real Time Headlines

According to the National Association of Home Builders (NAHB), there is currently a 4.4-month supply of new and existing homes for sale. Months of supply is a calculation commonly used in the market to measure how long it will take to sell all available homes at the current sales rate. A six-month supply is considered a balanced market between buyers and sellers.

Supply was already low at the start of the decade, but by early 2021, pandemic-driven demand pushed supplies to historic lows, with just enough for two months. A shortage of homes for sale, coupled with strong demand, has caused home prices to rise more than 40% from pre-pandemic levels.

Now supply is finally starting to pick up, but the gains are mostly coming from the new-home market, not existing homes. In fact, there is now a nine-month supply of new-build homes for sale, nearly three times the supply of existing homes. The months’ supply of new and used homes is often very close. According to NAHB, new construction currently accounts for 30% of the total inventory, about double the historical share.

“In June 2022, the monthly supply of new homes (9.9) led the monthly supply of existing single-family homes (2.9) by a record high,” NAHB Chief Economist Robert Dietz wrote. “This separation clearly shows that An assessment of current market inventory cannot simply examine existing or new home inventory in isolation.”

This unusual dynamic is driven by recent mortgage rate volatility and the unprecedented disaster in the housing market that began 20 years ago.

This real estate market is different from other markets because the economic forces are different from other markets. First, in 2005, home sales, home construction, and home prices surged due to a surge in subprime mortgages and a frenzy of trading in new financial products backed by those mortgages.

It all quickly collapsed, leading to one of the worst foreclosure crises since the Great Depression and triggering the subsequent Great Recession. Single-family housing starts fell sharply from 1.7 million units in 2005 to 430,000 units in 2011. Its historical average output is approximately 1.1 million units. They sat 990,000.

Then came the Covid-19 pandemic, during which consumer demand surged and mortgage rates hit more than a dozen record lows, so builders responded. Housing starts surged to 1.1 million units in 2021. Suddenly, supply is caught in a tornado of demand.

The current strange gulf between the supply of new and existing homes is also due to the roller coaster ride of mortgage rates, which fell to historic lows at the start of the pandemic before soaring to 20-year highs just two years later. Millions of borrowers refinanced at the low point and now don’t want to move because they would have to adjust their loan rates from 3% or 4% to current rates (around 7%). This lockdown effect has resulted in a drying up of new listings.

It also puts builders in the driver’s seat. Homebuilders had ramped up production in the early years of the pandemic, with production of single-family homes surging to more than 1.1 million units in 2021, according to the U.S. Census, only to fall back again as mortgage rates soared. Builders have been able to lower mortgage rates to keep sales higher, but as of May this year, they were building at an annualized pace of 992,000 units.

Redfin data shows resale listings improved slightly this spring as mortgage rates eased slightly, and by June, active listings were up 16.5% from a year earlier. However, part of the increase in supply is due to listings staying on the market longer.

“New listings have accelerated since March, but buyer demand remains tepid, and the proportion of homes on the market for at least a month has been increasing every year since mortgage rates began rising in 2022. ” According to a report from Redfin.

In the resale market, the $100,000 to $500,000 price tier has the lowest supply, according to the National Association of Realtors. That’s where most of today’s buyers are. Higher mortgage rates are prompting them to look for cheaper homes.

What’s interesting, however, is that while supply is increasing across all price tiers, it’s at the same low-end price tier that the supply is growing the most, meaning there simply isn’t enough supply. As homes come on the market faster, they are also going under contract.

For example, the supply of homes for sale priced between $100,000 and $250,000 is only 2.7 months old, but the supply is 19% higher than a year ago. Meanwhile, homes priced above $1 million were available for 4.2 months, but supply was only 5% higher than a year ago.

This explains why house prices remain high even as supply improves. Prices in May, the latest reading, were 4.9% higher than in May 2023, according to CoreLogic. Earnings have begun to shrink slightly, but not everywhere.

“Home prices have continued to rise strongly this spring in markets where inventory is well below pre-pandemic levels, such as the Northeast,” said Selma Hepp, chief economist at CoreLogic.

“Additionally, relatively more affordable markets, such as those in the Midwest, are also seeing healthy price increases this spring.”

Hupp noted that the supply of homes for sale has grown relatively sharply in Florida and Texas, but prices are currently below where they were a year ago.

While analysts expect home prices to slow and mortgage rates to fall in the second half of the year, it remains to be seen whether rates will actually fall and whether the imbalance between supply and demand will cool prices. If mortgage rates do fall, demand is sure to surge, putting more pressure on supply and causing prices to rise.

“Yes, inventories are rising and will continue to rise, especially as the mortgage rate lock-in effect weakens in the coming quarters. But current inventory levels continue to support new construction and some price growth across the country,” Dietz added road.